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Monday, September 22, 2014

Options Regulatory Alert #2014 - 34
PHLX, NOM, and BX Options Notify Participants of Inconsistencies with the Risk Monitor Mechanism

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  • Regulatory

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After a review of the function of the PHLX Risk Monitor Mechanism, described in PHLX Rule 1093, NOM Chapter VI Sec.19, and BX Options Chapter VI Sec.19, the Exchange has determined that the Mechanism does not function exactly as described in the rules. The Exchange is working on rule changes to better align rule text with the functioning of the Risk Monitor Mechanism.

The Mechanism provides protection to participants from the risk of multiple executions across multiple series of an option. Quoting across many series in an option creates the possibility of "rapid fire" executions that can create large, unintended principal positions that expose market makers, who are required to continuously quote in assigned options, to potentially significant market risk.  

The Exchange determined that the Mechanism did not function as the rule describes in the following instances:

  • The counting program operates on a rolling basis with a time window after each transaction, not singular and sequential time segments.
  • The Mechanism is engaged when a market maker's Specified Percentage (a defined exposure amount related to an underlying) is reached based on rounding the issue percentage to the near integer, not necessarily when the issue percentage equals or exceeds the market maker''s Specified Percentage.
  • The Mechanism is reset after a member firm purges their quotes in all options series for an underlying, not after they “refresh” their quote in one series.
  • Contrary to PHLX Rule 1093(d), the Exchange does not submit a quote on behalf of the member firm after the Mechanism removes a member firm’s quote (this rule discrepancy does not exist in the NOM or BX Options rulebooks).
     
     
     
     
     
     
     
     

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